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Financial Services Alert: Community Banks to Receive Regulatory Relief

08.14.2019

Federal banking regulatory agencies followed through with significant regulatory relief for community banks in July, as they issued final rules to exempt them from the Volcker Rule and to simplify capital deduction calculations under the Basel III international regulatory framework.

The Volcker Rule, which was not originally intended to apply to community banks, was issued in late 2013. The final rules issued on July 9, 2019, exclude banking entities that have $10 billion or less in total consolidated assets and total trading assets of not more than 5 percent of total consolidated assets from compliance with the Volcker Rule. The exemption will not apply to foreign banking organizations with a U.S. branch or agency.

Bank regulators also simplified the capital deduction calculations for banks that do not use the “advanced approaches” framework for calculating their capital requirements. The key provisions of the final rule include:

  • Increasing common equity tier 1 (CET1) capital threshold deductions from 10 percent to 25 percent for mortgage servicing assets (MSAs), certain deferred tax assets arising from temporary differences (DTAs) and investments in the capital of unconsolidated financial institutions.
  • Removing the need to distinguish between significant and nonsignificant investments in the capital of unconsolidated financial institutions.
  • Removing the aggregate 15 percent CET1 threshold deduction for MSAs, DTAs and significant investments in the capital of unconsolidated financial institutions.
  • Replacing the methodology to determine the amount of minority interest includable in capital with a limit of 10 percent for minority interest includable in each tier of regulatory capital, less any deductions and adjustments.
  • Retaining the 250 percent risk weight applicable to non-deducted amounts of MSAs and temporary difference DTAs.
  • Requiring a bank to apply the risk weight applicable to the exposure category of the investment for any non-deducted amount of investments in the capital of unconsolidated financial institutions.
  • Removing the 250 percent risk weight to be applied to non-deducted amounts of significant investments in the capital of unconsolidated financial institutions.
  • An effective date of April 1, 2020, for the changes to the threshold deductions and minority interest. The technical amendments are effective as of October 1, 2019, with an option for early adoption.
  • Any bank choosing the proposed Community Bank Leverage Ratio capital regime will not be subject to these Basel III capital deduction rules.

These rules will not only ease regulatory pressure for smaller lending institutions but may also provide new planning opportunities for community banks that are considering restructuring future balance sheets. Banks may need to model a variety of scenarios to determine which strategies to implement to take advantage of these new regulatory relief rules.

The links to the full regulatory releases detailing the changes under the Volcker Rule can be found here, and the full release detailing the simplified regulatory capital rules can be found here.

For more questions about these regulatory changes and how they may provide planning opportunities for your banking entity or to learn more about our full suite of services for the financial services industry, contact Lincoln Gray, Financial Services Industry Group Leader, at lgray@bswllc.com or 314.983.1235.

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